<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarter period ended March 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from ______ to ______
Commission File Number: 0-10640
COLLAGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2300486
- ---------------------- ----------------------------------
State of Incorporation I.R.S. Employer Identification No.
2500 Faber Place, Palo Alto, California 94303
Telephone: (415) 856-0200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1997, Registrant had outstanding 10,736,179 shares of common
stock, exclusive of 1,947,900 shares held by the Registrant as treasury stock.
<PAGE> 2
COLLAGEN CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
- --------------------------------------- --------
<S> <C>
Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996. . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations-
Three and nine months ended March 31, 1997 and 1996. . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . 11-20
Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
PART II. Other Information
- -----------------------------------
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
2
<PAGE> 3
COLLAGEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996*
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,529 $ 21,676
Short-term investments 5,984 3,691
Accounts receivable, net 8,912 9,508
Inventories, net 13,840 9,563
Other current assets, net 9,957 11,496
--------------- ---------------
Total current assets 51,222 55,934
Property and equipment, net 15,922 15,147
Intangible assets and goodwill, net 13,126 14,824
Investment in Target Therapeutics, Inc. 83,890 65,841
Other investments & assets, net 14,284 11,261
--------------- ---------------
$ 178,444 $ 163,007
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,753 $ 3,824
Other accrued liabilities 12,858 11,869
Income taxes payable 2,990 7,588
Notes payable 5,068 5,079
--------------- ---------------
Total current liabilities 23,669 28,360
Long-term liabilities:
Deferred income taxes 37,037 27,674
Other long-term liabilities 3,854 3,444
Minority interest 141 528
--------------- ---------------
Total long-term liabilities 41,032 31,646
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized: 5,000,000 shares;
none issued and outstanding --- ---
Common stock, $.01 par value, authorized: 28,950,000 shares,
issued: 10,735,975 shares at March 31, 1997 (10,575,614
shares at June 30, 1996), outstanding: 8,788,075 shares at
March 31, 1997 (8,775,614 shares at June 30, 1996) 108 106
Additional paid-in capital 66,576 64,844
Retained earnings 41,265 42,378
Cumulative translation adjustment (1,546) (656)
Unrealized gain on available-for-sale investments 48,106 34,549
Treasury stock, at cost, 1,947,900 shares at March 31, 1997
(1,800,000 shares at June 30, 1996) (40,766) (38,220)
--------------- ---------------
Total stockholders' equity 113,743 103,001
--------------- ---------------
$ 178,444 $ 163,007
=============== ===============
</TABLE>
* Amounts derived from audited financial statements.
3
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COLLAGEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 16,527 $ 16,587 $ 52,369 $ 50,410
Other --- --- --- 2,000
----------- ----------- ----------- ------------
16,527 16,587 52,369 52,410
----------- ----------- ----------- ------------
Costs and expenses:
Cost of sales 4,461 5,207 14,927 14,278
Selling, general and administrative 10,963 10,051 30,291 28,820
Officer separation cost 2,006 --- 2,006 ---
Research and development 4,558 3,424 13,244 8,928
Acquired in-process research and development --- --- --- 14,800
----------- ----------- ----------- ------------
21,988 18,682 60,468 66,826
----------- ----------- ----------- ------------
Loss from operations (5,461) (2,095) (8,099) (14,416)
Other income (expense):
Net gain on investments, principally
Target Therapeutics, Inc. --- 36,285 9,222 67,672
Equity in earnings (losses) of affiliates, net (133) (690) (730) (783)
Interest income 238 291 897 742
Interest expense (120) (35) (351) (87)
----------- ----------- ----------- ------------
Income (loss) before income taxes and minority
interest (5,476) 33,756 939 53,128
Provision (benefits) for income taxes (1,726) 14,356 1,674 32,809
Minority interest (189) --- (491) ---
----------- ----------- ----------- ------------
Net income (loss) $ (3,561) $ 19,400 $ (244) $ 20,319
=========== =========== =========== ============
Net income (loss) per share $ (.41) $ 2.14 $ (.03) $ 2.24
=========== =========== =========== ============
Shares used in calculating per share information 8,764 9,084 8,806 9,086
============ =========== =========== =============
</TABLE>
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COLLAGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (244) $ 20,319
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Acquired in-process research and development -- 14,800
Depreciation and amortization 4,524 4,429
Equity in losses of affiliates 730 783
Gain on investments, net of taxes paid of $5.2 million and (4,051) (34,680)
$33.0 million in 1997 and 1996, respectively
Other adjustments related to changes in
assets and liabilities (5,461) (1,036)
-------- --------
Net cash provided by (used in) operating activities (4,502) 4,615
-------- --------
Cash flows from investing activities:
Proceeds from sale of Target Therapeutics, Inc. stock, net of taxes paid 5,578 48,346
Proceeds from sales and maturities of short-term investments 4,675 4,043
Purchases of short-term investments (6,968) (1,719)
Expenditures for property and equipment (3,901) (1,769)
Increase in intangible and other assets (36) (1,730)
Expenditures for investments in and loans to affiliates (1,891) (8,972)
Acquisition of LipoMatrix, Incorporated, net of cash balances -- (22,608)
Accrued purchase consideration and other costs of
acquisition of LipoMatrix -- 2,359
-------- --------
Net cash provided by (used in) investing activities (2,543) 17,950
-------- --------
Cash flows from financing activities:
Repurchase of common stock (2,547) (3,034)
Net proceeds from issuance of common stock 1,734 726
Cash dividends paid (1,754) (676)
Net borrowing under bank loans 465 5,070
-------- --------
Net cash provided by (used in) financing activities (2,102) 2,086
-------- --------
Net increase (decrease) in cash and cash equivalents (9,147) 24,651
Cash and cash equivalents at beginning of period 21,676 6,155
-------- --------
Cash and cash equivalents at end of period $ 12,529 $ 30,806
======== ========
</TABLE>
5
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COLLAGEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of
Collagen Corporation (the "Company"), a Delaware corporation, and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company operates in one
industry segment focusing on the development, manufacturing and sale of
medical devices. Investments in unconsolidated subsidiaries, and other
investments in which the Company has a 20% to 50% interest or otherwise has
the ability to exercise significant influence, are accounted for under the
equity method. Investments in companies in which the Company has less than
20% interest with no readily determinable fair value are carried at cost or
estimated realizable value, if less, and those with a readily determinable
fair value are carried at market value.
The consolidated balance sheet as of March 31, 1997, the consolidated
statements of operations for the three and nine months ended March 31, 1997
and 1996, and the condensed consolidated statements of cash flows for the
nine months ended March 31, 1997 and 1996, have been prepared by the
Company, without audit. In the opinion of management, all necessary
adjustments (which include only normal recurring adjustments) have been
made to present fairly the financial position, results of operations and
cash flows at March 31, 1997 and for all periods presented. Interim results
are not necessarily indicative of results for a full fiscal year. The
consolidated balance sheet as of June 30, 1996 is from the audited
consolidated financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June
30, 1996 included in the Company's Annual Report on Form 10-K/A for the
year ended June 30, 1996.
New Accounting Standards
STOCK OPTIONS. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS#123"), which establishes a fair value
method of accounting for stock options and other equity instruments. The
Company adopted SFAS#123 beginning in fiscal year 1997 and will use the
disclosure method for valuing stock-based compensation as described in the
statement.
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings
Per Share ("SFAS#128"), which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate
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all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded.
The impact of SFAS#128 is expected to result in no change to the Company's
net loss per share for the three and nine months ended March 31, 1997,
because stock options have been excluded from the current computation as
they are antidilutive. The impact of SFAS#128 is expected to result in an
increase to basic earnings per share for the three and nine months ended
March 31, 1996, of $.04 per share, respectively. The Company has not yet
determined what the impact will be on the calculation of the Company's
fully diluted earnings per share.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Raw materials $ 1,133 $ 1,148
Work-in-process 5,833 3,630
Finished goods 6,874 4,785
--------------- ----------------
$ 13,840 $ 9,563
=============== ----------------
</TABLE>
Inventories increased approximately $4.3 million or 45%, to $13.8 million
at March 31, 1997, compared to inventories of $9.6 million at June 30,
1996, resulting primarily from lower than expected sales of Trilucent(TM)
breast implant ("Trilucent") and injectable collagen products and inventory
build-up for the Company's new product line, Hylaform(R) viscoelastic gel
("Hylaform gel"). In response to the lower than expected current Trilucent
sales, the Company has decreased its annual production level of Trilucent.
The Company expects inventories at June 30, 1997, to be at the same level
or slightly lower than at March 31, 1997.
3. Investment in Target Therapeutics, Inc. (Boston Scientific Corporation)
The Company accounts for its investment in Target Therapeutics, Inc.
("Target") as an available-for-sale equity security, which is carried at
market value. During the three months ended March 31, 1997, the Company was
precluded from selling any shares of Target common stock by mutual
agreement and applicable pooling-of-interests restrictions with respect to
the Target and Boston Scientific merger. During the nine months ended March
31, 1997, the Company sold 330,000 shares of Target common stock for a
pre-tax gain of approximately $9.2 million. Target's common stock was
quoted on The Nasdaq Stock Market prior to closing the merger with Boston
Scientific on April 8, 1997. The closing price of Target's stock at March
31, 1997 was $65.75 per share. At March 31, 1997, the Company held
1,275,888 shares of Target's common stock.
At June 30, 1996 and March 31, 1997, the Company's shares of Target common
stock were recorded at the estimated fair value of $65.8 million and $83.9
million, respectively.
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The $58.4 million unrealized gain ($65.8 million estimated fair value less
$7.4 million cost) at June 30, 1996, and the $78.0 million unrealized gain
($83.9 million estimated fair value less $5.9 million cost) at March 31,
1997, on these available-for-sale securities has been reported as a
separate component of stockholders' equity, net of tax.
On January 20, 1997, Boston Scientific Corporation (of Natick,
Massachusetts) and Target jointly announced the signing of a definitive
agreement to merge in a tax-free stock-for-stock transaction. On April 8,
1997, the merger was completed and, as a result, the Company received
approximately 1,365,200 shares of Boston Scientific in exchange for the
Company's 1,275,888 shares of Target's common stock. Pursuant to the merger
agreement, the Company is restricted from selling its shares of Boston
Scientific common stock until the expiration of applicable
pooling-of-interests restrictions, which is expected to occur during the
quarter ending September 30, 1997.
Boston Scientific is a leading manufacturer of catheter-based devices that
can be inserted through small body openings and are used in heart surgery
and other operations. Boston Scientific common stock is quoted on the New
York Stock Exchange under the symbol BSX. On April 30, 1997, the closing
price of Boston Scientific common stock was $48.25 per share, resulting in
a decrease of $18.0 million in the estimated fair value of the Company's
holdings in Target/Boston Scientific from the value at March 31, 1997.
4. Investment in Innovasive Devices, Inc.
Prior to October 1996, the Company's 844,000 shares of common stock of
Innovasive Devices, Inc. ("Innovasive Devices") were valued at cost or
$4,064,000 due to restrictions which prevented the sale of any of the
Company's shares of common stock of Innovasive Devices. At March 31, 1997,
restrictions were no longer applicable on 541,000 shares of common stock
which the Company holds in Innovasive Devices. As a result, the Company now
carries the non-restricted portion of its investment in Innovasive Devices
as an available-for-sale investment at market value, or $5.9 million,
reflecting an unrealized gain of $3.3 million, which has been included in a
separate component of stockholders' equity, net of tax. The remaining
303,000 restricted shares of common stock continue to be valued at cost.
During the three and nine months ended March 31, 1997, the Company did not
sell any of its shares of common stock of Innovasive Devices. Innovasive
Devices' common stock is quoted on The Nasdaq Stock Market. The closing
price of Innovasive Devices' common stock at March 31, 1997, was $11.00 per
share. At March 31, 1997, the Company held approximately a 12% ownership
position in Innovasive Devices.
5. Stock Repurchase Program
In February 1993, the Company's Board of Directors authorized a stock
repurchase program. Since the inception of the stock repurchase program,
the Company has repurchased 1,947,900 shares of its common stock at an
average acquisition price of approximately $21 per share. During the nine
months ended March 31, 1997, 147,900
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shares were repurchased and as of such date, the Company is authorized to
repurchase an additional 352,100 shares under the program. The Company
currently plans to keep the repurchased shares as treasury stock and may
use this stock in various company stock benefit plans.
6. Officer Separation Cost
The officer separation cost of $2.0 million, 12% and 4% of product sales,
respectively, in the three and nine months ended March 31, 1997, was a
charge related to Howard Palefsky's separation package in connection with
Mr. Palefsky's resignation as the Company's Chief Executive Officer. Mr.
Palefsky will continue to serve as Chairman of the Board of Directors and a
consultant to the Company. The current period costs include payments made
to the former officer and costs associated with an existing loan to Mr.
Palefsky. In addition, by agreement, the Company expects to continue to
make payments to Mr. Palefsky during the next two years.
7. Income Taxes
The provision for income taxes for the nine months ended March 31, 1997,
was computed by determining income tax expense on year-to-date earnings,
excluding losses from foreign subsidiaries for which no tax benefit is
realizable, as well as other non-deductible items such as goodwill
amortization. The provision for income taxes for the nine months ended
March 31, 1996, was computed by applying the estimated annual income tax
rate of approximately 54% (excluding the impact of the acquired in-process
R&D charge in 1996 for which no tax benefit was available) to income before
income taxes. The higher effective tax rate in the current year was
primarily due to lower projected income for the year and the impact of
non-deductible items such as losses from foreign subsidiaries, the
amortization of a full year of goodwill and equity losses in affiliates.
8. Per Share Information
Net income (loss) per share for the three and nine months ended March 31,
1997 and 1996, have been computed based upon the weighted average number of
common stock and, when dilutive, common stock equivalent shares
outstanding. Shares used in the per share computations are as follows (in
thousands):
9
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<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, March 31,
------------------------- -----------------------
1997 1996 1997 1996
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Primary:
Common stock 8,764 8,885 8,806 8,931
Stock options --- 199 --- 155
----------- --------- -------- -----------
Weighted average number of common stock
and dilutive common stock equivalent
shares equivalent shares outstanding 8,764 9,084 8,806 9,086
=========== ========= ======== ===========
</TABLE>
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include,
without limitation, those mentioned in this report and, in particular, the
factors described below under "Factors That May Affect Future Results of
Operations" as well as those under the same heading in the Company's Annual
Report on Form 10-K/A for the fiscal year ended June 30, 1996.
The Company
Collagen Corporation (the "Company") is a technology-based company that
develops, manufactures and markets biomedical devices for the treatment of
defective, diseased, traumatized or aging human tissues.
The Company's revenues are derived primarily from the sale of products
principally used in reconstructive and cosmetic applications for the face and
breast, the treatment of stress urinary incontinence, and in bone repair. The
Company markets its reconstructive and cosmetic products directly and through a
network of international distributors and its stress urinary incontinence and
bone repair products through marketing partners.
In addition to internal research and development ("R&D") and joint product
development arrangements, the Company has an active program for developing new
products through affiliated companies in which the Company makes equity and debt
investments. The Company believes the formation of new companies allows each to
focus its technology on select market segments to bring products to market
efficiently and to expand its proprietary knowledge.
Aesthetic Technologies(TM) and Collagen Technologies Groups
The Board of Directors and management have reviewed various strategic
alternatives to improve the market's recognition of the intrinsic value of the
Company. As a result, the Company announced on January 8, 1997, that it will
formally separate the Aesthetic Technologies(TM) Group, its profitable aesthetic
and reconstructive surgery business, and form a new company, Aesthetic
Technologies Corporation. Aesthetic Technologies Corporation will focus on
developing its profitable aesthetic and reconstructive surgery business with
strong and growing product offerings that encompass many new exciting
technologies in aesthetic medicine. Management and the Board of Directors will
continue to evaluate strategies for Aesthetic Technologies Corporation, which
may include a public offering, a "spin-off" or a "split-off", among other
alternatives. The timing and nature of these actions will depend upon tax,
legal, market and other considerations.
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The Company's other business activities consist primarily of the Collagen
Technologies Group, which develops novel collagen and polymer materials, as well
as internal and affiliate company-sponsored product development programs in the
fields of orthopedics, soft-tissue repair, vascular surgery and ophthalmology.
The Collagen Technologies Group also manufactures and sells Collagraft(R) bone
graft matrix and Collagraft(R) bone graft matrix strip ("Collagraft bone graft
products") to the Company's marketing partner, Zimmer, Inc. ("Zimmer"), a
division of Bristol Myers-Squibb Company. In addition, Collagen Technologies
Group holds equity investments in and product development and supply agreements
with four privately held affiliates and equity investments in two public
companies, Boston Scientific Corporation (after its April 1997 acquisition of
Target Therapeutics, Inc. ("Target") ) and Innovasive Devices, Inc. ("Innovasive
Devices").
The planned formation of Aesthetic Technologies Corporation does not affect the
presentation of the Company's financial results presented for the three and nine
months ended March 31, 1997.
Results of Operations
The following tables show for the periods indicated the percentage relationship
to product sales of certain items in the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Percent of Product Sales
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Product sales 100% 100% 100% 100%
Other revenues --- --- --- 4%
Costs and expenses:
Cost of sales 27% 31% 29% 28%
Selling, general and administrative 66% 61% 58% 57%
Officer separation cost 12% --- 4% ---
Research and development 28% 21% 25% 18%
</TABLE>
Product sales. Product sales in the three months ended March 31, 1997 were $16.5
million, which were unchanged from the same prior-year quarter. Product sales of
$52.4 million in the nine months ended March 31, 1997, increased approximately
$2.0 million or 4%, compared to product sales of $50.4 million for the same
prior-year period. The increase in sales for the nine months ended March 31,
1997, was primarily due to the increase in international sales of plastic
surgery and dermatological products (which includes injectable collagen
products, Trilucent(TM) breast implant ("Trilucent"), and Hylaform(R)
viscoelastic gel ("Hylaform gel") ) and an increase in revenue from direct sales
of Contigen(R) implant ("Contigen") to physician customers by C.R. Bard, Inc.
("Bard"), the Company's marketing partner for Contigen, partially offset by a
decrease in sales of Collagraft bone graft products to the Company's marketing
partner, Zimmer. (See "Operating income/loss" below.)
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Worldwide sales of plastic surgery and dermatological products of $13.7 million
for the three months ended March 31, 1997, decreased approximately $500,000 or
3%, compared to worldwide sales of plastic surgery and dermatological products
of $14.2 million for the same prior-year period. Worldwide sales of plastic
surgery and dermatological products for the nine months ended March 31, 1997
were $44.7 million, up 4 %, from sales of $43.2 million for the same prior-year
period. The decrease in sales for the three months ended March 31, 1997, was due
to lower sales of injectable collagen products, partially offset by sales from
the Company's new product line, Hylaform gel. The increase in sales for the nine
months ended March 31, 1997, was a result of an increase in sales in the
Trilucent and Hylaform gel product lines. The Company believes that the sales
growth in its dermatological products in the current fiscal year was a result of
increased demand by consumers for a wide variety of aesthetic procedures and
continued physician interest in cosmetic procedures not reimbursed by
third-party payers.
Worldwide unit sales of plastic surgery and dermatological products for
the three months ended March 31, 1997, decreased approximately 2% over the same
prior-year period, as a result of lower international sales of injectable
collagen products. Worldwide unit sales of plastic surgery and dermatological
products for the nine months ended March 31, 1997, increased approximately 7 %
over the same prior-year period. Domestically, implementation of United States
marketing programs designed to increase average treatment volume per patient
and to attract and retain new and existing patients have favorably impacted
overall unit sales, but have unfavorably impacted realized revenue per unit of
product sold. The addition of Hylaform gel, which was launched in Europe in
November 1996, has also favorably impacted overall unit sales.
During the three and nine months ended March 31, 1997, pursuant to terms of an
agreement between the Company and Bard, the Company recorded revenue of $2.1
million and $5.6 million, respectively, from Bard based on Bard's direct sales
of Contigen to physician customers. In June 1995, the Company announced that it
expected to ship little, if any, Contigen to Bard due to excess inventory at
Bard. The Company recorded minimal revenue from shipments of Contigen to Bard in
the three and nine months ended March 31, 1997, and March 31, 1996. In April
1997, the Company announced that it had received orders from Bard and the
Company will resume shipments of Contigen to Bard during the fourth quarter of
fiscal 1997.
For the three and nine months ended March 31, 1997, sales of Collagraft bone
graft products to Zimmer, were approximately $597,000 and $1.6 million,
respectively, compared to $664,000 and $2.5 million in the same periods in the
prior year. The decrease in sales in the current fiscal year periods was due to
lower sales by Zimmer and a consequent decrease in shipments from the Company.
The Company expects sales and shipments of Collagraft bone graft products for
fiscal 1997 to be less than those recorded during fiscal 1996.
A number of uncertainties exist surrounding the marketing and distribution of
Contigen and Collagraft bone graft products. The Company's primary means of
distribution for these products is through third party firms, Bard in the case
of Contigen and Zimmer in the case of Collagraft bone graft products. The
Company's business and financial results could be adversely affected in the
event that either or both of these parties are unable to market the products
effectively, anticipate customer demand accurately, or effectively manage
industry-wide pricing and cost containment pressures in health care.
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Other revenues. Other revenues in the nine months ended March 31, 1996 consisted
of a final milestone payment of $2 million from Bard in accordance with an
agreement between the Company and Bard.
Cost of sales. Cost of sales as a percentage of product sales was 27% and 29%
for the three and nine months ended March 31, 1997, compared with 31% and 28%
for the same periods in the prior year. The lower cost of sales as a percentage
of product sales in the three months ended March 31, 1997, was primarily a
result of an increase in the amount of units produced and an increase in
Contigen royalties received with minimal cost of sales. The higher cost of sales
as a percentage of product sales in the nine months ended March 31, 1997, was
primarily a result of the change in product mix (i.e., Trilucent and Hylaform
gel) which has resulted in higher costs per unit.
Due to the high fixed costs of the Company's Fremont, California manufacturing
facility, unit cost of manufacturing for collagen-based injectable products is
expected to remain highly dependent on the level of output at the Company's
manufacturing facility and continued demand for the collagen-based injectable
product lines. The Company anticipates that overall unit costs will be slightly
lower in fiscal 1997 compared to fiscal 1996.
SG&A. Selling, general and administrative ("SG&A") expenses of $11.0 million in
the three months ended March 31, 1997, increased approximately $.9 million or
9%, compared to SG&A expenses of $10.1 million for the same prior-year period.
SG&A expenses of $30.3 million in the nine months ended March 31, 1997,
increased approximately $1.5 million or 5%, compared to SG&A expenses of $28.8
million for the same prior-year period. The increase in SG&A expenses in the
current fiscal quarter resulted primarily from the acceleration of expenses in
preparation for trial in the Company's trade secrets lawsuit against Matrix
Pharmaceuticals ("Matrix"). The increase in SG&A expenses in the current
nine-month period resulted primarily from the acceleration of expenses in
preparation for trial in the Company's trade secrets lawsuit against Matrix, the
inclusion of nine months of SG&A expenses of LipoMatrix, Incorporated
("LipoMatrix"), the developer and manufacturer of Trilucent, and amortization
expenses on purchased intangibles and goodwill resulting from the acquisition of
LipoMatrix compared to seven months for the same period in the prior year. SG&A
expenses as a percentage of product sales were 66% and 58% for the three and
nine months ended March 31, 1997, respectively, compared to 61% and 57% for the
same periods in the prior year. The higher SG&A expenses as a percentage of
product sales in the three and nine months ended March 31, 1997, was primarily
due to costs incurred to prepare for the Matrix lawsuit, partially offset by
lower sales and marketing launch costs.
Officer separation cost. The officer separation cost of $2.0 million in the
three and nine months ended March 31, 1997, 12% and 4% of product sales,
respectively, was a charge related to Howard Palefsky's separation package in
connection with Mr. Palefsky's resignation as the Company's Chief Executive
Officer. Mr. Palefsky will continue to serve as Chairman of the Board of
Directors and a consultant to the Company. The current period costs include
payments made to the former officer and costs associated with an existing loan
to Mr. Palefsky. In addition, by agreement, the Company expects to continue to
make payments to Mr. Palefsky during the next two years.
R&D. Research and development ("R&D") expenses, which include expenditures for
regulatory compliance, were $4.6 million and $13.2 million (28% and 25% of
product sales) for the three
14
<PAGE> 15
and nine months ended March 31, 1997, an increase of 33% and 48% over
$3.4 million and $8.9 million (21% and 18% of product sales), respectively, for
the same periods in the prior year. The increase in R&D spending in the current
fiscal quarter was primarily attributable to the inclusion of R&D expenses for
Cohesion Corporation ("Cohesion") as a result of the Company increasing its
ownership percentage to 81% in June 1996, the costs associated with the
Trilucent clinical trial program in the United States and Europe, and the
write-off of two abandoned patents. The increase in R&D spending in the current
fiscal nine-month period was primarily attributable to the inclusion of nine
months of LipoMatrix R&D expenses compared to seven months for the same period
in the prior year, the inclusion of R&D expenses for Cohesion as a result of
the Company increasing its ownership percentage to 81% in June 1996, the costs
associated with the Trilucent clinical trial program in the United States and
Europe, and the write-off of two patents. The Trilucent clinical trial program
in the United States and Europe is expected to take several years and may
involve multiple product design changes and clinical studies. The Company
expects internal R&D spending in fiscal 1997 to be at levels higher than fiscal
1996 due to the inclusion of expenses of Cohesion and a full year of expenses
for LipoMatrix.
Acquired in-process research and development. The charge for acquired in-process
research and development ("in-process R&D") of $14.8 million in the nine months
ended March 31, 1996, was a non-recurring charge related to the acquisition of
LipoMatrix. The value attributed to in-process R&D was determined by an
independent appraisal. Substantial effort, including clinical trials and
regulatory approval, still is required before Trilucent can be marketed in the
United States and in additional countries.
Operating income/loss. Operating loss was $5.5 million and $8.1 million for the
three and nine months ended March 31, 1997, compared with operating losses of
$2.1 million and $14.4 million for the same prior-year periods. The loss in the
current fiscal quarter was primarily due to the acceleration of expenses in
preparation for trial in the Company's trade secrets lawsuit against Matrix, a
non-recurring charge for officer separation costs, and the costs associated with
commencing Trilucent clinical trials in the United States and Europe. The loss
in the current nine-month period was primarily due to the acceleration of
expenses in preparation for trial in the Company's trade secrets lawsuit against
Matrix, a non-recurring charge for officer separation costs, the inclusion of
nine months of LipoMatrix operating expenses compared to seven months for the
same period in the prior year, the inclusion of the operating results of
Cohesion, and the costs associated with commencing Trilucent clinical trials in
the United States and Europe. The Company's consolidated $14.4 million operating
loss for the nine months ended March 31, 1996, was primarily due to the $14.8
million acquisition-related, non-recurring in-process R&D charge related to
LipoMatrix.
Compared with foreign exchange rates for the same prior-year quarter, the impact
of foreign exchange rates in the current fiscal quarter on operating income was
a net decrease of $304,000 on equivalent local currency basis, resulting from a
decrease of approximately $417,000 in revenue, partially offset by a decrease of
approximately $113,000 in operating expenses. Compared with foreign exchange
rates for the same prior-year period, the impact of foreign exchange rates in
the current fiscal nine-month period on operating income was a net decrease of
$123,000 on equivalent local currency basis, resulting from a decrease of
approximately $559,000 in revenue, partially offset by a decrease of
approximately $436,000 in operating expenses. Until December 1994, the Company's
policy was to hedge material foreign currency transaction exposures. At June 30,
1996 and March 31, 1997, no foreign
15
<PAGE> 16
currency transaction exposures were hedged. Unhedged net foreign assets were
$14.5 million and $9.1 million at June 30, 1996 and March 31, 1997,
respectively.
Gain on investments, net. In the three months ended March 31, 1997, the Company
was precluded from selling any shares of Target Therapeutics, Inc. ("Target")
common stock by mutual agreement and applicable pooling-of-interests
restrictions with respect to the Target and Boston Scientific merger. In the
nine months ended March 31, 1997, the Company recorded a gain on investments of
$9.2 million ($4.0 million after taxes of $5.2 million), resulting from the sale
of 330,000 shares of Target common stock. Pursuant to the merger agreement, the
Company is restricted from selling its shares of Boston Scientific common stock
until the expiration of applicable pooling-of-interests restrictions, which is
expected to occur during the quarter ending September 30, 1997.
Equity in earnings/losses of affiliate companies. Equity in losses of affiliate
companies was approximately $133,000 for the three months ended March 31, 1997,
compared to equity in losses of approximately $690,000 for the same prior-year
quarter. For the nine months ended March 31, 1997, equity in losses of affiliate
companies was approximately $730,000 compared with losses of approximately
$783,000 in the same prior-year period.
The Company intends to continue to expand its new product development activities
through more equity investments in or loans to affiliate companies during fiscal
year 1997. These affiliate companies typically are in an early stage of
development and may be expected to incur substantial losses, which in turn will
have an adverse effect on the Company's operating results. There can be no
assurance that these investments will result in positive returns nor can there
be any assurance on the timing of any return on investment, or that the Company
will not lose its entire investment.
Interest income. Interest income was $238,000 and $897,000 for the three and
nine months ended March 31, 1997, respectively, compared with $291,000 and
$742,000 for the same periods in the prior year. The decrease in the current
fiscal quarter was primarily due to lower average short-term investment
balances, resulting from restrictions placed on the Company's ability to sell
its shares of Target common stock. The increase in the current fiscal nine-month
period was primarily due to higher average short-term investment balances,
resulting primarily from the sale of Target stock.
Income tax. The provision for income taxes for the nine months ended March 31,
1997, was computed by determining income tax expense on year-to-date earnings,
excluding losses from foreign subsidiaries for which no tax benefit is
realizable, as well as other non-deductible items such as goodwill amortization.
The provision for income taxes for the nine months ended March 31, 1996, was
computed by applying the estimated annual income tax rate of approximately 54%
(excluding the impact of the acquired in-process R&D charge in 1996 for which no
tax benefit was available) to income before income taxes. The higher effective
tax rate in the current year was primarily due to lower projected income for the
year and the impact of non-deductible items such as losses from foreign
subsidiaries, the amortization of a full year of goodwill and equity losses
in affiliates.
16
<PAGE> 17
Liquidity and Capital Resources
At March 31, 1997, the Company's cash, cash equivalents and short-term
investments were $27.4 million compared to $25.4 million at June 30, 1996. Net
cash used in operating activities was approximately $4.5 million in the nine
months ended March 31, 1997, compared to approximately $4.6 million of net cash
provided by operating activities for the same prior-year period.
The $4.5 million of net cash used in operating activities in the nine months
ended March 31, 1997, was mainly attributable to a $4.6 million decrease in
income taxes payable resulting from estimated payments made related to the sales
of Target stock, a $4.3 million increase in inventory, and a $.9 million
unfavorable foreign currency translation impact, partially offset by $1.3
million of net income after adjusting for depreciation and amortization expense,
equity in losses (earnings), gain on investments (net of taxes paid) and loss on
disposal of fixed assets and intangibles, a $1.8 million decrease in
miscellaneous receivables related to the sales of Target stock, a $1.6 million
provision for costs associated with a senior officer's loan, and a $.6 million
decrease in accounts receivable. The inventory increase resulted primarily
from lower than expected sales of Trilucent(TM) breast implant ("Trilucent")
and injectable collagen products and inventory build-up for the Company's new
product line, Hylaform(R) viscoelastic gel ("Hylaform gel"). In response to
the lower than expected current Trilucent sales, the Company has decreased its
annual production level of Trilucent. The Company expects inventories at
June 30, 1997, to be at the same level or slightly lower than at March 31, 1997.
The $4.6 million of net cash used in investing and financing activities in the
nine months ended March 31, 1997, was primarily due to payments of $7.0 million
to purchase short-term investments, capital expenditures of approximately $3.9
million, payments of approximately $2.5 million to repurchase 147,900 shares of
the Company's common stock at an average acquisition price of approximately
$17.00 per share, payments of approximately $1.9 million for additional
investments in affiliates, and payment of cash dividends of approximately $.9
million and $.9 million to the Company's stockholders in July 1996 and January
1997, respectively, partially offset by proceeds of $5.6 million net of taxes
paid ($10.8 million proceeds less taxes paid of $5.2 million) from the sale of
330,000 shares of common stock of Target by the Company during the period, $4.7
million proceeds received from the sale of short-term investments, and $1.7
million from the issuance of approximately 160,000 shares of the Company's
common stock.
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $10 million in fiscal 1997. As of
March 31, 1997, the Company's capital expenditures, equity investments in, and
loans to affiliate companies totaled approximately $5.8 million. In November
1996, the Company's Board of Directors declared a cash dividend of 10 cents per
share to stockholders of record on December 16, 1996. This dividend totaled
approximately $869,000 and was paid to stockholders on January 15, 1997. The
Company anticipates that the Board of Directors will review the possibility of
declaring an additional dividend before the end of the current fiscal year.
Additionally, in June 1996, the Board of Directors authorized the Company to
repurchase an additional 500,000 shares of the Company's common stock in the
open market, of which the Company has repurchased 147,900 shares as of March 31,
1997.
The Company's principal sources of liquidity include cash generated from
operations, sales of Target stock, and its cash, cash equivalents and short-term
investments. During the fiscal quarter ended September 30, 1994, the Company's
Board of Directors authorized the Company to sell portions of its holdings of
Target's common stock. Between July 1, 1994 and March 31,
17
<PAGE> 18
1997, the Company sold an aggregate of 3,312,500 shares of Target common stock
(adjusted for a two-for-one stock split in December 1995) for an aggregate
pre-tax gain of approximately $101.1 million ($116.6 million proceeds less cost
basis of $15.5 million). At March 31, 1997, the Company held 1,275,888 shares of
Target's common stock. The Company anticipates that stock sales pursuant to the
authorization will be made from time to time, under SEC Rules 144 and 145, with
the objective of generating cash, for, among other things, further investments
in both current and new affiliate companies. On January 20, 1997, Boston
Scientific Corporation (of Natick, Massachusetts) and Target jointly announced
the signing of a definitive agreement to merge in a tax-free stock-for-stock
transaction. On April 8, 1997, the merger was completed and, as a result, the
Company received approximately 1,365,200 shares of Boston Scientific in exchange
for the Company's 1,275,888 shares of Target's common stock. Pursuant to the
merger agreement, the Company is restricted from selling its shares of Boston
Scientific common stock until the expiration of applicable pooling-of-interests
restrictions, which is expected to occur during the quarter ended September 30,
1997.
In addition, the Company established a $7.0 million revolving credit facility
with a bank in November 1994, which was subsequently increased to $15.0 million
in December 1995. As of March 31, 1997, $10.0 million of this credit facility
remained unused. Additionally, the Company has a $2.8 million (4.1 million Swiss
Francs) credit facility that was established by LipoMatrix prior to the
Company's acquisition of LipoMatrix, of which $802,000 (1.2 million Swiss
Francs) remained unused as of March 31, 1997.
The Company's capital requirements will depend on numerous factors, including
market acceptance and demand for the Company's products; the resources the
Company devotes to the development, manufacture and marketing of its products;
the progress of the Company's clinical research and product development
programs; the extent to which the Company enters into collaborative
relationships with third parties and the scope of the Company's obligations in
such relationships; the receipt of, and the time required to obtain, regulatory
clearances and approvals; the resources required to protect the Company's
intellectual property and other factors. The timing and amount of such capital
requirements cannot be accurately predicted. Funds may also be used for the
acquisition of businesses, products and technologies that are complementary to
those of the Company. The Company believes that its current sources of liquidity
should be adequate to fund its anticipated capital requirements through at least
the next 18 months. However, during this period or thereafter, the Company may
require additional financing. There can be no assurance that such additional
financing will be available on terms favorable to the Company or at all.
Factors That May Affect Future Results of Operations
A large portion of the Company's revenues in recent years has come from its
international operations. As a result, the Company's operations and financial
results could be significantly affected by international factors, including
numerous regulatory agencies, changes in foreign currency exchange rates and
foreign economic and political conditions generally. The Company's operating
strategy takes into account changes in these factors over time; however, the
Company's results of operations could be significantly affected in the short
term by fluctuations in foreign currency exchange rates or disruptions to
shipments.
18
<PAGE> 19
All of the Company's manufacturing capacity for collagen products, the majority
of its research and development activities, its corporate headquarters, and
other critical business functions are located near major earthquake faults. In
addition, all of the Company's manufacturing capacity for collagen-based
products and Trilucent are located in two primary facilities (one for
collagen-based products and one for Trilucent), with the Company currently
maintaining only limited amounts of finished product inventory. While the
Company has some limited protection in the form of disaster recovery programs
and basic insurance coverage, the Company's operating results and financial
condition would be materially adversely affected in the event of a major
earthquake, fire or other similar calamity, affecting its manufacturing
facilities.
The Company is involved in various legal actions arising in the course of
business, some of which involve product liability and intellectual property
claims. The Company operates in an industry susceptible to claims that may
allege that the use of the Company's technology or products has resulted in
adverse effects or infringes on third-party technology. With respect to product
liability claims, such risks will exist even with respect to those products that
have received or in the future may receive regulatory approval for commercial
sale. It is possible that adverse product liability or intellectual property
actions could negatively affect the Company's future results of operations.
The Company has been and may be in the future the subject of negative publicity,
which can arise from various sources, ranging from the news media on cosmetic
procedures in general to legislative and regulatory investigations specific to
the Company concerning, among other things, the safety and efficacy of its
products. The Company is confident of the safety and effectiveness of its
products; however, there can be no assurance that such investigations or
negative publicity from such investigations or from the news media will not
result in a material adverse effect on the Company's future financial position,
its results of operations or the market price of its stock. In addition,
significant negative publicity could result in an increased number of product
liability claims.
The Company's manufacturing activities and products sold in the United States
are subject to extensive and rigorous regulations by the FDA and by comparable
agencies in certain foreign countries where these products are manufactured or
distributed. The FDA regulates the manufacture and sale of medical devices in
the U.S., including labeling, advertising and record keeping. Failure to obtain,
or delays in obtaining, the required regulatory approvals for new products, as
well as product recalls, both inside and outside of the U.S. could adversely
affect the Company. The Company is pursuing a Trilucent clinical trial program
in Europe and the United States, which is expected to take several years and may
involve multiple product design changes and clinical studies. At this time, the
Company has no further plans to expand the existing studies beyond previously
scheduled patients. The data generated in the program would constitute part of a
Pre-Market Application ("PMA") submission to permit marketing in the United
States. The PMA must be approved prior to market launch of the product.
Due to the factors noted above, as well as other factors that may affect the
Company's operating results, the Company's future earnings and stock price may
be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period. Additionally, the Company may
not learn of, or be able to confirm, such shortfalls until late in the fiscal
quarter, or following the end of the quarter, which could result in an even more
immediate and adverse effect on the trading price of the Company's common stock.
Finally, the Company participates in a highly dynamic industry, which often
results in significant volatility of the Company's common stock.
19
<PAGE> 20
For a more complete discussion of risks and uncertainties involving the
Company's business, please see the risks factors described under the heading
"Factors That May Affect Future Results of Operations" set forth in the
Company's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1996.
20
<PAGE> 21
PART II. OTHER INFORMATION
COLLAGEN CORPORATION
Item 1. Legal Proceedings
On December 21, 1994, the Company filed suit against Matrix
Pharmaceutical, Inc., ("Matrix") alleging fraud, misappropriation of
trade secrets, unfair competition, breach of fiduciary duty, inducing
breach of contract, breach of duty of loyalty and tortious
interference. The Company alleges that Matrix, which uses collagen for
certain drug delivery applications, unlawfully obtained the Company's
confidential and proprietary information relating to Collagen's
products and operations by hiring ten former employees that the
Company alleges had access to or were knowledgeable about the
Company's proprietary information. On February 12, 1995, Matrix denied
the Company's allegations and filed a cross-complaint charging the
Company with, among other things, unfair competition, defamation and
restraint of trade. Matrix also has requested certain declaratory
relief. Howard Palefsky, the Company's Chairman of the Board of
Directors, was personally named as an additional defendant to the
Matrix defamation charge. On September 24, 1996, a Demurrer and Motion
to Strike Matrix's third amended complaint was sustained in Collagen's
favor, dismissing Matrix's anti-trust and common law restraint of
trade claims.
The Company's motion for summary judgment on Matrix's counterclaims
(defamation, breach of contract and implied covenant, and unfair
competition) was denied, although the Company was successful in
dismissing some of Matrix's affirmative defenses to the Company's
claims. The Company has filed a petition of writ of mandate seeking
appellate review of the denial of summary judgment on the defamation
and breach of contract and implied covenant claims. A trial date has
been rescheduled for May 21, 1997. At that time, the court is expected
to rule on several pending motions, including motions relating to
discovery matters and the conduct of the trial.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
21
<PAGE> 22
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.87 - Agreement between Howard D. Palefsky and the
Registrant dated March 15, 1997
Exhibit 10.88 - Employment Agreement between Gary Petersmeyer and the
Registrant dated February 7, 1997
Exhibit 10.89 - Form of Management Continuity Agreement between
certain officers of the Company and the Registrant dated February 7,
1997
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
None
22
<PAGE> 23
COLLAGEN CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------- -----------
<S> <C>
Exhibit 10.87 Agreement between Howard D. Palefsky and the Registrant
dated March 15, 1997
Exhibit 10.88 Employment Agreement between Gary Petersmeyer and the
Registrant dated February 7, 1997
Exhibit 10.89 Form of Management Continuity Agreement between certain
officers of the Company and the Registrant dated February 7,
1997
Exhibit 27 Financial Data Schedule
</TABLE>
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLLAGEN CORPORATION
Date: May 12, 1997 /s/ Norman Halleen
------------------
Norman Halleen
Vice President, Finance and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
24
<PAGE> 1
Exhibit 10.87
AGREEMENT entered into as of the 15th day of March, 1997, by and
between COLLAGEN CORPORATION ("COLLAGEN") and HOWARD PALEFSKY ("PALEFSKY").
RECITALS
A. PALEFSKY is presently employed by COLLAGEN as its Chairman and
Chief Executive Officer.
B. PALEFSKY desires to terminate his position as COLLAGEN's
Chairman and Chief Executive Officer but to continue his association with
COLLAGEN, and COLLAGEN is willing to accept such termination and to continue
such association.
IT IS THEREFORE AGREED as follows:
1. Resignation as Executive. PALEFSKY hereby resigns as Chairman
and Chief Executive Officer of COLLAGEN effective March 15, 1997 (the "Effective
Date").
2. Continued Employment.
(a) Notwithstanding such resignation, PALEFSKY shall continue
to serve as a director of COLLAGEN and, at the discretion of the Board of
Directors, as Chairman of its Board of Directors for the balance of his present
term as a director. Upon the mutual consent of COLLAGEN and PALEFSKY, PALEFSKY
shall be nominated for election at each of the next two annual elections of
directors by the stockholders of COLLAGEN.
(b) In addition, COLLAGEN agrees to employ PALEFSKY as a
consultant and PALEFSKY agrees to provide consulting services to COLLAGEN for a
period of three years from the Effective Date. PALEFSKY shall be available to
spend, except during normal
<PAGE> 2
vacation periods, an average of 40 hours per month during the first year of his
consultancy and an average of 20 hours per month, except during normal vacation
periods, during the second and third year of his consultancy (at times
reasonably convenient to PALEFSKY and COLLAGEN), during which he shall perform
such consultancy services as shall reasonably be requested by the Chief
Executive Officer of COLLAGEN.
3. Compensation and Related Matters.
(a) Consulting Fee. During each of the first 24 months
of his consultancy, PALEFSKY shall be paid a consulting fee of $29,166.67.
(b) Additional Compensation. As additional compensation for
services during his consultancy and for his noncompetition agreement pursuant to
Section 4 hereof, COLLAGEN shall (i) pay to him a bonus of $650,000 within 30
days from the Effective Date; (ii) conditioned on completion of the first year
of his consultancy and noncompetition after the Effective Date, COLLAGEN shall
pay to PALEFSKY a bonus of $225,000 on the first anniversary date of this
Agreement and shall also forgive $425,000 of the principal and any accrued
interest thereon of outstanding loans totaling $475,000 in principal, dated
August 1994, June 1995 and December 1995 made to PALEFSKY by COLLAGEN; and (iii)
conditioned in addition on completion of the second year of his consultancy
after the Effective Date, COLLAGEN shall forgive the balance of the principal
and any accrued interest thereon of the said loans and shall also forgive the
entire principal balance and any accrued interest thereon of the
-2-
<PAGE> 3
$1,080,000 loan dated February 1996, made by COLLAGEN to PALEFSKY.
(c) Cancellation of Prior Bonus Agreement. The parties confirm
that the Cash Bonus Agreement dated February 13, 1996, between the parties shall
be superseded by this Agreement and shall be of no further force or effect.
(d) Expenses. During his consultancy, PALEFSKY shall be
entitled to prompt reimbursement for all reasonable expenses incurred by him in
performing his duties hereunder, provided that such expenses are incurred and
accounted for in accordance with the normal policies and procedures established
by COLLAGEN.
(e) Other Benefits. During the term of his consultancy, for
the period provided by COBRA, PALEFSKY shall be entitled to continue to
participate in each COLLAGEN medical plan, dental plan, vision plan and employee
assistance plan in which he now participates. Such participation shall be at
COLLAGEN's expense during the first year after the Effective Date and at
PALEFSKY's expense thereafter.
(f) Stock Options. All of PALEFSKY's options to
purchase COLLAGEN stock shall continue to vest during his period of consultancy
and shall in any event be 100 percent vested on conclusion of his consultancy
for any reason.
(g) Services Furnished. During the first twelve months from
the Effective Date, COLLAGEN shall furnish to PALEFSKY, at COLLAGEN's expense,
office space comparable to his current office space and such services as are
suitable to his consultancy and adequate for the performance of his duties,
-3-
<PAGE> 4
including but not limited to the services of his present administrative
assistant if she is able and willing to provide such services or, if she is not,
the services of a suitable replacement. During the first twelve months from the
Effective Date, such administrative assistant shall continue to be employed by
COLLAGEN at its expense and shall continue to be entitled to participate in all
COLLAGEN employee benefit programs, provided that she shall only be entitled to
participate in any COLLAGEN bonus programs for the year 1997. The above services
shall be furnished at such location in the San Francisco Bay Area as the parties
may reasonably agree.
(h) Continuation of Payments. If PALEFSKY should become
permanently disabled, as determined under COLLAGEN's long-term disability
policy, during the term of this Agreement, the payments set forth in paragraphs
3(a) and 3(b) and the benefits provided in paragraph 3(e) shall continue to be
made to him. If PALEFSKY should die during the term of this Agreement, the
payments and forgiveness of loans set forth in paragraphs 3(a) and 3(b) shall
continue to be made to or for the benefit of his written designee or his estate
as set forth in Section 7 hereof.
(i) Confidential Information, Secrecy, and Inventions. So long
as PALEFSKY is retained as a consultant to COLLAGEN pursuant to the terms of
this Agreement, PALEFSKY shall continue to be bound by the confidentiality,
secrecy or invention provisions of any agreement between COLLAGEN and him by
which he is presently bound.
4. Noncompetition.
-4-
<PAGE> 5
(a) During the period of his consultancy, PALEFSKY agrees that
he will not, directly or indirectly, by way of ownership, management or
otherwise, whether or not for compensation, either as a consultant, employer,
employee, agent, principal, partner, stockholder (other than ownership of less
than three percent of the outstanding capital stock of a publicly-traded
corporation), officer, director or in any other representative or individual
capacity engage in any activity relating to the COLLAGEN Business. The term
"COLLAGEN Business" shall mean any development, manufacture, distribution or
sale of collagen for cosmetic or therapeutic purposes, and includes only those
companies listed in Exhibit A, attached hereto.
(b) The provisions of this Section 4 shall not be deemed to
prevent PALEFSKY from acting as a consultant, employee, agent, stockholder,
officer or director of a corporation or other entity which is not listed in
Exhibit A, and which is engaged in the COLLAGEN Business, even if any such
company also includes groups or divisions that are engaged in the COLLAGEN
Business, provided that PALEFSKY does not participate directly or indirectly in
any such activities (including without limitation the evaluation of licensing or
acquisition opportunities).
5. Termination.
(a) By COLLAGEN. COLLAGEN may terminate PALEFSKY's consultancy
and its obligation to make payments to him for his consultancy at any time for
Cause. COLLAGEN shall have Cause to terminate PALEFSKY's consultancy upon (i)
his continued failure to substantially perform his duties hereunder (other than
a
-5-
<PAGE> 6
failure resulting from his disability) after written notice delivered to him
that specifically identifies the manner in which PALEFSKY has not substantially
performed his duties, or (ii) the engaging by PALEFSKY in knowingly illegal or
grossly negligent conduct which is materially injurious to the Company.
(b) By PALEFSKY. PALEFSKY may voluntarily terminate his
consultancy with and/or resign as a director of COLLAGEN at any time. If he
should voluntarily resign his consultancy, PALEFSKY shall not thereafter be
entitled to any further payment of consultancy fees or other payments and
forgiveness of loans under paragraphs 3(a) and 3(b) or the benefits and services
described in paragraphs 3(e) and 3(g).
6. Insurance and Indemnity. COLLAGEN shall, to the extent permitted by
law, include PALEFSKY during the term of this Agreement under any directors and
officers liability insurance policy maintained for its directors and officers,
with coverage at least as favorable to PALEFSKY in amount and each other
material respect as the coverage of other directors and officers covered
thereby. This obligation to provide insurance and indemnify PALEFSKY shall
survive expiration or termination of this Agreement with respect to proceedings
or threatened proceedings based on acts or omissions of PALEFSKY occurring
during PALEFSKY's employment with COLLAGEN or with any affiliated company. Such
obligations shall be binding upon COLLAGEN's successors and assigns and shall
inure to the benefit of PALEFSKY's heirs and personal representatives.
7. Successors; Binding Agreement. This Agreement and all
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rights of PALEFSKY hereunder shall inure to the benefit of and be enforceable by
PALEFSKY's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees, and shall be binding on
the successors and assigns to COLLAGEN. If PALEFSKY should die while any amounts
would still be payable to him or loans should remain to be forgiven hereunder if
he were living, all such amounts shall be paid or forgiven in accordance with
the terms of this Agreement to or for the benefit of his written designee or, if
there be no such designee, to his estate.
8. Notice. For the purposes of this Agreement, notices, demands and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to PALEFSKY: Howard PALEFSKY
COLLAGEN Corporation
2500 Faber Place
Palo Alto, CA 94303
If to COLLAGEN: COLLAGEN Corporation
2500 Faber Place
Palo Alto, CA 94303
Attention: Chief Executive Officer
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9. Modification or Waiver; Entire Agreement. No provision of this
Agreement may be modified or waived except in a document signed by PALEFSKY and
COLLAGEN. This Agreement, along with any
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stock option or restricted stock agreements between the parties, constitute the
entire agreement between the parties regarding their employment relationship,
and any other agreements are terminated and of no further force or legal effect.
No agreements or representations, oral or otherwise, with respect to the subject
matter hereof have been made by either party which are not set forth expressly
in this Agreement.
10. Governing Law; Severability. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
11. Withholding. All payments required to be made by COLLAGEN
hereunder to PALEFSKY or his estate or beneficiaries shall be subject to the
withholding of such amounts as COLLAGEN may reasonably determine it should
withhold pursuant to any applicable federal or state income tax law.
12. Arbitration. In the event of any dispute or claim relating to or
arising out of the parties' employment or consulting relationship or this
Agreement (including, but not limited to, any claims of breach of contract,
wrongful termination or age, race, sex, disability or other discrimination), all
such disputes shall be fully, finally and exclusively resolved by binding
arbitration conducted under the rules of the American Arbitration Association in
Santa Clara County, California; provided, however, that this arbitration
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provision shall not apply to any disputes or claims relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or proprietary
information.
13. Miscellaneous. No right or interest to, or in, any payments shall
be assignable by PALEFSKY; provided, however, that this provision shall not
preclude PALEFSKY from designating in writing one or more beneficiaries to
receive any amount that may be payable after his death and shall not preclude
the legal representative of his estate from assigning any right hereunder to the
person or persons entitled thereto. This Agreement shall be binding upon and
shall inure to the benefit of PALEFSKY, his heirs and legal representatives and
COLLAGEN and its successors.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date and year first above written.
COLLAGEN CORPORATION
By: /s/ Charlene Friedman /s/ Howard Palefsky
--------------------- -------------------
HOWARD PALEFSKY
Title: General Counsel and
--------------------
Assistant Secretary
-------------------
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EXHIBIT A
LIST OF COMPANIES
MENTOR
INAMED
MEDICIS
COLLAGENESIS
ISOLAGEN
FIBROGEN
FUSION MEDICAL
REGEN BIOLOGICS
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<PAGE> 1
Exhibit 10.88
COLLAGEN CORPORATION
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is dated as of February 7,
1997 by and between Gary S. Petersmeyer ("Employee") and Collagen Corporation, a
Delaware corporation (the "Company" or "Collagen").
RECITALS
A. Employee served as the Company's President and Chief Operating
Officer from February 10, 1995 to February 7, 1997 and as President and Chief
Executive Officer effective February 7, 1997. The Company's Board of Directors
believes it is in the best interests of the Company and its stockholders to
retain Employee and provide incentives to Employee to continue in the service of
the Company. Accordingly, the Board of Directors of the Company and Employee
agree to enter into this Agreement.
B. In addition, it is expected that another company may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors. The Board of Directors recognizes that such consideration can be a
distraction to Employee and can cause Employee to consider alternative
employment opportunities. The Board of Directors has determined that it is in
the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
C. The Board of Directors further believes that it is imperative to
provide Employee with certain benefits upon a Change of Control and, under
certain circumstances, upon termination of Employee's employment in connection
with a Change of Control, which benefits are intended to provide Employee with
financial security and provide sufficient income and encouragement to Employee
to remain with the Company, notwithstanding the possibility of a Change of
Control.
Now therefore, in consideration of the mutual promises, covenants and
agreements contained herein, the parties hereto agree as follows:
1. Duties.
(a) Position. Employee shall be employed as President and
Chief Executive Officer, and as such will have responsibility for the overall
operation of the Company and will report to the Company's Board of Directors
(the "Board").
<PAGE> 2
(b) OBLIGATIONS TO THE COMPANY. Employee agrees to the best of
his ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof, and to the reasonable satisfaction of
the Company. During the term of Employee's employment relationship with the
Company, Employee further agrees that he will devote all of his business time
and attention to the business of the Company, the Company will be entitled to
all of the benefits and profits arising from or incident to all such work
services and advice, Employee will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Board, and Employee will
not directly or indirectly engage or participate in any business that is
competitive in any manner with the business of the Company. Nothing in this
Agreement will prevent Employee from accepting speaking or presentation
engagements in exchange for honoraria or from serving on boards of charitable
organizations, or from owning no more than 1% of the outstanding equity
securities of a corporation whose stock is listed on a national stock exchange.
Employee will comply with and be bound by the Company's operating policies,
procedures and practices from time to time in effect during the term of
Employee's employment.
2. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason. If Employee's
employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
this Agreement. The rights and duties created by this Section 2 may not be
modified in any way except by a written agreement executed by an officer of the
Company upon direction from the Board.
3. COMPENSATION. For the duties and services to be performed by
Employee hereunder, the Company shall pay Employee, and Employee agrees to
accept, the salary, stock options, bonuses and other benefits described below in
this Section 3.
(a) SALARY. Effective February 7, 1997, Employee shall receive
an annual base salary of $300,000.00. Employee's salary will be payable pursuant
to the Company's normal payroll practices. Employee's salary shall be reviewed
on at least an annual basis by the Board or its Human Resources Committee for
possible adjustment.
(b) STOCK OPTIONS AND OTHER INCENTIVE PROGRAMS. Employee shall
be eligible to participate in any stock option or other incentive programs
available to officers or employees of the Company. On February 7, 1997, Employee
was granted an additional option to purchase 145,000 shares of Common Stock of
the Company pursuant to the Company's 1994 Stock Option Plan, subject to the
standard terms and conditions (including vesting at the rate of 2% per month
over 50 months) of the 1994 Stock Option Plan and the options granted
thereunder.
(c) BONUSES. Employee's entitlement to incentive bonuses from
the Company is discretionary and shall be determined by the Board or its Human
Resources Committee in
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good faith based upon the extent to which Employee's individual performance
objectives and the Company's profitability objectives and other financial and
nonfinancial objectives are achieved during the applicable bonus period.
(d) ADDITIONAL BENEFITS. Employee will be eligible to
participate in the Company's employee benefit plans of general application,
including, without limitation, those plans covering medical, disability and life
insurance in accordance with the rules established for individual participation
in any such plan and under applicable law. Employee will be eligible for
vacation and sick leave in accordance with the policies in effect during the
term of this Agreement and will receive such other benefits as the Company
generally provides to its other employees of comparable position and experience.
(e) REIMBURSEMENT OF EXPENSES. Employee shall be authorized to
incur on behalf and for the benefit of the Company, and shall be reimbursed by
the Company for, reasonable expenses, provided that such expenses are
substantiated in accordance with Company policies.
4. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT. This Agreement may be
terminated at any time upon the occurrence of any of the following events:
(i) The Company's determination in good faith
that it is terminating Employee for Cause (as defined in Section 5 below);
(ii) The Company's determination that it is
terminating Employee without Cause, which determination may be made by the
Company at any time at the Company's sole discretion, for any or no reason;
(iii) The effective date of a written notice sent
to the Company from Employee stating that Employee is electing to terminate his
employment with the Company; or
(iv) Following Employee's death or disability.
(b) SEVERANCE BENEFITS. Employee shall be entitled to
receive severance benefits upon termination of employment only as set forth in
this Section 4(b):
(i) VOLUNTARY TERMINATION. If Employee
voluntarily resigns from the Company (other than as an Involuntary Termination
(as defined below)), then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary, bonuses
and unpaid vacation accrued as of the date of Employee's termination of
employment and Employee's benefits will be continued under the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination and in accordance with applicable law.
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(ii) INVOLUNTARY TERMINATION APART FROM A CHANGE
OF CONTROL. In the event that Employee's employment is terminated as a result of
an Involuntary Termination other than for Cause, either prior to the occurrence
of a Change of Control or after the 24-month period following the effective date
of a Change of Control, then Employee will be entitled to receive the following
benefits: (A) a lump sum payment within five days after the date of termination
of employment equal to 12 months of Employee's then current base salary, (B) a
lump sum payment as soon as practicable after the date of termination of
employment equal to Employee's scheduled bonus for the Company's fiscal year in
which the termination occurs or, if no such bonus has been scheduled, equal to
the bonus paid to Employee for the Company's fiscal year prior to the Company's
fiscal year in which the termination occurs and (C) each stock option to
purchase the Company's Common Stock granted to Employee over the course of his
employment with the Company and held by Employee on the date of termination of
employment shall become immediately vested on such date as to that number of
shares that would have vested in accordance with the terms of such option
(assuming that Employee had remained in Continuous Status as an Employee, as
defined in the relevant plan and option agreement, for 12 months after the date
of termination of employment) as of the date 12 months after the date of
termination of employment and each such option shall be exercisable in
accordance with the provisions of the option agreement and plan pursuant to
which such option was granted. In addition, Employee will receive payment(s) for
all salary, bonuses and unpaid vacation accrued as of the date of Employee's
termination of employment and Employee's benefits will be continued under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination and in accordance with
applicable law.
(iii) TREATMENT OF STOCK OPTIONS UPON A CHANGE OF
CONTROL. In the event of a Change of Control and unless otherwise limited by the
provisions of Section 7, each stock option to purchase the Company's Common
Stock granted to Employee over the course of his employment with the Company and
held by Employee on the effective date of a Change of Control shall become
immediately vested on such date as to that number of shares that would have
vested in accordance with the terms of such option (assuming that Employee had
remained in Continuous Status as an Employee, as defined in the relevant plan
and option agreement, for 24 months after the date of termination of employment)
as of the date 24 months after the effective date of the Change of Control and
each such option shall be exercisable in accordance with the provisions of the
option agreement and plan pursuant to which such option was granted.
(iv) INVOLUNTARY TERMINATION FOLLOWING A CHANGE
OF CONTROL. In the event that Employee's employment is terminated as a result of
an Involuntary Termination other than for Cause at any time within 24 months
following the effective date of a Change of Control, then Employee will be
entitled to receive severance benefits as follows: (A) a lump sum payment within
five days after the date of termination of employment equal to 24 months of
Employee's then current base salary, (B) a lump sum payment as soon as
practicable after the date of termination of employment equal to two times
Employee's scheduled bonus for the Company's fiscal year in which the
termination occurs or, if no such bonus has been scheduled, equal to two times
the bonus paid to Employee for the Company's fiscal year prior to the Company's
fiscal year in which the termination occurs and (C) in the event that the
acceleration of vesting provided for in Section 4(b)(iii) did not occur due to
the provisions of Section 7 on the
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effective date of the Change of Control, then, except to the extent that the
provisions of Section 7 would not permit acceleration of vesting pursuant to
this Section 4(b)(iv), each stock option to purchase the Company's Common Stock
granted to Employee over the course of his employment with the Company and held
by Employee on the date of termination of employment shall become immediately
vested on such date as to that number of shares that would have vested in
accordance with the terms of such option (assuming that Employee had remained in
Continuous Status as an Employee, as defined in the relevant plan and option
agreement, for 24 months after the date of termination of employment) as of the
date 24 months after the date of termination of employment and each such option
shall be exercisable in accordance with the provisions of the option agreement
and plan pursuant to which such option was granted. In addition, Employee will
receive payment(s) for all salary, bonuses and unpaid vacation accrued as of the
date of Employee's termination of employment and Employee's benefits will be
continued under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination and
in accordance with applicable law.
(v) TERMINATION FOR CAUSE. If Employee's
employment is terminated for Cause at any time, then Employee shall not be
entitled to receive payment of any severance benefits. Employee will receive
payment(s) for all salary, bonuses and unpaid vacation accrued as of the date of
Employee's termination of employment and Employee's benefits will be continued
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in accordance
with applicable law.
(vi) TERMINATION BY REASON OF DEATH OR DISABILITY.
In the event of Employee's death during the term of this Agreement, the Company
shall pay to Employee or Employee's estate Employee's scheduled bonus for the
Company's fiscal year in which death occurred or, if no such bonus has been
scheduled, equal to the bonus paid to Employee for the Company's fiscal year
prior to the year in which death occurred. In addition, Employee's estate will
receive payment(s) for all salary, bonuses and unpaid vacation accrued as of the
date of Employee's death and any other benefits payable under the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of death and in accordance with applicable law. In the
event that, during the term of this Agreement, Employee is unable to perform his
job due to disability (as determined under the Company's long-term disability
insurance program) for 6 months in any 12-month period, the Company may, at its
option, terminate Employee's employment with the Company and such termination
shall be deemed to be an Involuntary Termination other than for Cause apart from
a Change of Control and Employee shall be entitled to receive the benefits set
forth in Section 4(b)(ii) hereof.
5. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "Beneficial
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Owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities without the
approval of the Board;
(ii) MERGER/SALE OF ASSETS. A merger or
consolidation of the Company whether or not approved by the Board, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 50% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets; or
(iii) CHANGE IN BOARD COMPOSITION. A change in
the composition of the Board, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of February 7, 1997 or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but an Incumbent Director shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or willful
misconduct in the performance of Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries (ii) repeated
unexplained or unjustified absence from the Company, (iii) a material and
willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and Employee's
voluntary termination, upon 30 days prior written notice to the Company,
following (i) a material reduction or change in job duties, responsibilities and
requirements inconsistent with the Employee's position with the Company and the
Employee's prior duties, responsibilities and requirements or a change in
Employee's reporting relationship such that Employee is no longer reporting to
the Board; (ii) any reduction of Employee's base compensation (other than in
connection with a general decrease in base salaries for most officers of the
successor corporation); or (iii) Employee's refusal to relocate to a facility or
location more than 30 miles from the Company's current location.
6. LIMITATION ON PAYMENTS. In the event that the severance and other
benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the
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meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") and (ii) but for this Section, would be subject to the excise tax
imposed by Section 4999 of the Code, then the Employee's severance benefits
under Sections 4(b)(iii) and (iv) shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result
in no portion of such severance benefits being subject to excise tax under
Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under Section 4(b)(iii) and (iv), notwithstanding that all or
some portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 6 shall be made in writing by
independent public accountants agreed to by the Company and the Employee (the
"Accountants"), whose determination shall be conclusive and binding upon the
Employee and the Company for all purposes. For purposes of making the
calculations required by this Section 6, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Section
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 6.
7. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the
Board, upon consultation with the Company management and the Company's
independent auditors, that the enforcement of any agreement between Employee and
the Company, including the provisions of Section 4(b) of this Agreement, which
allows for the acceleration of vesting of stock options granted for the
Company's Common Stock upon the effective date of a Change of Control or
thereafter, would preclude accounting for any proposed business combination of
the Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be accounted
for as a pooling of interests, then any such provision of this Agreement shall
be null and void. For purposes of this Section 7, the Board's determination
shall require the unanimous approval of the non-employee Board members.
8. AESTHETIC TECHNOLOGIES CORPORATION. The Company has recently
announced its intention to formally separate its Aesthetic Technologies Group
and form a new corporation, Aesthetic Technologies Corporation ("AT"). The Board
and management of the Company will continue to evaluate strategies for Aesthetic
Technologies Corporation, which may include a public offering, a "spin-off" or a
"split-off", among other alternatives. In the event that a management team is
selected for AT and Employee is a member of such management team, at the time of
any grant of options to members of the AT management team, Employee will be
granted options to purchase that number of shares of AT Common Stock
representing 3% of the
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outstanding Common Stock of AT, such percentage to be based on a percentage of
the outstanding Common Stock of AT on a fully-diluted basis as of the date of
grant, after giving effect to such grant and to grants made to other members of
the AT management team on such date. Such options will have the same terms and
conditions, including exercise price and vesting, as the options granted to
other members of the AT management team. It is currently contemplated that such
AT options will vest over a four year period, with 1/4th of the shares subject
to the option vesting one year after the vesting commencement date determined by
AT's Board of Directors on the date of grant and 1/48th of the shares subject to
the option vesting each month thereafter. At the time of, and as a condition of,
the grant of any options to purchase AT Common Stock, Employee will agree that
all options he then holds to purchase Collagen Common Stock will cease vesting
at the time the AT options begin vesting. Thereafter, Employee's options to
purchase Collagen Common Stock will be exercisable in accordance with the
provisions of the option agreement and plan pursuant to which such option was
granted. Once Employee's options to purchase Collagen Common Stock have ceased
vesting, there will be no acceleration of the vesting of such options,
notwithstanding the provisions of Section 4(b) hereof. However, in such event,
the AT options granted to Employee will be subject to the provisions of this
Agreement, including the vesting acceleration provisions of Section 4(b) hereof.
If Employee becomes an employee of AT, AT will assume all of the Company's
obligations under this Agreement. The distribution of assets of the Company to
AT, an initial public offering of AT Common Stock, a distribution of shares of
AT Common Stock to the stockholder of the Company or the termination of
Employee's employment with the Company in connection with commencement of his
employment by AT will not by itself or together result in any obligation to of
the Company to make any payments to Employee pursuant to Section 4 of this
Agreement.
9. CONFIDENTIALITY AGREEMENT. Employee has signed a Confidential
Information and Invention Assignment Agreement (the "Confidentiality Agreement")
substantially in the form attached hereto as Exhibit A. Employee hereby
represents and warrants to the Company that he has complied with all obligations
under the Confidentiality Agreement and agrees to continue to abide by the terms
of the Confidentiality Agreement and further agrees that the provisions of the
Confidentiality Agreement shall survive any termination of this Agreement or of
Employee's employment relationship with the Company.
10. INDEMNIFICATION AGREEMENT. Employee has entered into an
Indemnification Agreement dated as of February 10, 1995 (the "Indemnification
Agreement") with the Company. The Company agrees that, throughout the term of
this Agreement, the Indemnification Agreement shall remain in full force and
effect, subject to any amendments thereto agreed upon by Employee and the
Company. In the event that Employee becomes an employee of AT or any other
successor or affiliate of the Company, Employee and his subsequent employer
company shall enter into an indemnification agreement having substantially the
same terms as the Indemnification Agreement, and the Indemnification Agreement
shall then be terminated unless Employee continues to serve as an officer or
director of the Company.
11. CONFLICTS. Employee represents that his performance of all the
terms of this Agreement will not breach any other agreement to which Employee is
a party. Employee has
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not, and will not during the term of this Agreement, enter into any oral or
written agreement in conflict with any of the provisions of this Agreement.
Employee further represents that he is entering into or has entered into an
employment relationship with the Company of his own free will and that he has
not been solicited as an employee in any way by the Company.
12. SUCCESSORS. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
and thereunder shall inure to the benefit of, and be enforceable by, Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
13. NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Employee shall be
addressed to Employee at the home address which Employee most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
14. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by Employee and by an authorized officer of the Company
(other than Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.
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(d) CHOICE OF LAW. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the option of either party
by binding arbitration in the County of Santa Clara, California, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
Punitive damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The Company shall pay
Employee's reasonable legal fees, including costs and expenses incurred in
connection with negotiating this Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 14(h) shall be
void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(l) ADVICE OF COUNSEL. EACH PARTY TO THIS AGREEMENT
ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE
OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL,
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<PAGE> 11
AND HAS READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT.
THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE
DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
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<PAGE> 12
The parties have executed this Agreement the date first written above.
COLLAGEN CORPORATION
By: /s/ William G. Davis
----------------------------------
Title: Chairman, H. R. Committee
-------------------------------
Address: 2500 Faber Place
Palo Alto, California 94303
GARY S. PETERSMEYER
Signature: /s/ Gary S. Petersmeyer
Address: 447 Van Buren
-----------------------------
Los Altos, CA
-----------------------------
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<PAGE> 13
EXHIBIT I
AGREEMENT REGARDING PROPRIETARY
INFORMATION AND INVENTIONS
<PAGE> 14
EXHIBIT I
AGREEMENT REGARDING PROPRIETARY INFORMATION
AND INVENTIONS
RECITALS
I am, or am about to become, an employee or consultant of COLLAGEN
CORPORATION, a Delaware corporation ("Collagen") or a subsidiary of COLLAGEN.
For purposes of this Agreement, "COLLAGEN" shall include any subsidiary of the
COLLAGEN.
COLLAGEN is and will in the future be engaged in a continuous program
of research, development and production relating to its business, present and
future, including fields generally related to its business. In addition,
COLLAGEN may in the future provide consulting services to its clients' relating
to such clients' research, development and production program.
I understand that during the course of my employment by COLLAGEN, I
may develop and work on new processes, techniques, and inventions and make new
contributions of value to COLLAGEN.
The purpose of this Agreement is to set forth my understanding and
agreement relating (i) to information of a confidential, secret or proprietary
nature which I may learn, acquire or develop during the course of or in
connection with my employment and (ii) to the right of COLLAGEN to all
Inventions (as defined herein).
Consequently, I, Gary Petersmeyer , am making and executing this
AGREEMENT REGARDING PROPRIETARY INFORMATION AND INVENTIONS (the "Agreement").
AGREEMENT
In exchange for my employment and or the continued employment and for
the compensation paid to me by COLLAGEN, I, Gary Petersmeyer, acknowledge and
agree that:
1. Acknowledgment of and Incorporation of Recitals
The Recitals set forth above are part of this agreement; they
are true and correct. Further, my employment creates a relationship of
confidence and trust between COLLAGEN and me regarding all proprietary
information, as defined in this Agreement.
2. Definition of Proprietary Information
As used in this Agreement, the term "Proprietary Information"
refers to any and all information of a confidential, proprietary, or secret
nature Which is or may be either (i) applicable to, or related in any way to,
the business, present or future, of COLLAGEN, or (ii) applicable to, or related
in any way to, the business of any client of COLLAGEN which may be
<PAGE> 15
made known to me by COLLAGEN or by any client of COLLAGEN or that I learn
during the period of my employment. For purposes of this Agreement, the term
"client" includes any customer, consultant or business associate, including,
without limitation, other individuals, partnerships and companies with which
COLLAGEN has a proposed or actual business arrangement.
Proprietary Information shall include, but not be limited to,
that of a technical nature such as methods, know-how, formulae, compositions,
processes, formulations, discoveries, machines, inventions, computer programs
and similar items or research projects that are of a business nature such as
information about cost, purchasing, advertising, litigation, profits, markets,
customers, medical investigations, clinical studies, FDA or other governmental
applications and that pertain to future developments such as research and
development, new products, or future marketing and merchandising plans.
3. Proprietary Information to be kept Confidential
I agree that Proprietary Information is a special, valuable
and unique asset of the business of COLLAGEN's business. I agree both during my
employment and afterwards to keep in confidence and trust all Proprietary
Information. I agree that I will not directly or indirectly disclose or cause
or permit to be used or disclosed, except as may be necessary in the ordinary
course of performing my duties as an employee of COLLAGEN, any Proprietary
Information or anything relating thereto without the written consent of
COLLAGEN.
4. Other Employment and Return of Data Upon Termination
I agree that during my employment by COLLAGEN, I will not,
without COLLAGEN's express written consent, directly or indirectly engage in
any employment or activity which may be detrimental to COLLAGEN. This includes
any line of business in which COLLAGEN is now or may hereafter become engaged.
If my employment with COLLAGEN terminates for any reason, I agree to promptly
deliver to COLLAGEN all documents, data, records, customer lists and other
information of any nature pertaining to or acquired in connection with my
employment which relates in any way to Proprietary Information.
5. Disclosure to COLLAGEN: Inventions as Sole Property of COLLAGEN
I agree to promptly disclose to COLLAGEN, or any persons or
entity designated by COLLAGEN, all developments, improvements discoveries,
inventions, compositions, formulae, processes, techniques, know-how and data,
whether or not patentable (hereinafter "Inventions") and works of authorship,
whether or not copyrightable, that I make, conceive or first reduce to practice
or learn, whether alone or jointly with others, during the period of my
employment, whether or not in the course of my employment.
I further acknowledge and agree that all Inventions and works
of authorship, which are in any way related to or useful in the business of
COLLAGEN or of any client of COLLAGEN, or result from tasks assigned to me or
that I undertake, shall be the sole property of COLLAGEN. COLLAGEN may
designate any other person or entity to be the sole owner of
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<PAGE> 16
all applications and patents on said Inventions, works of authorship and rights
under the Paris Convention in any and all countries. To that end, I shall
execute all documents which COLLAGEN determines to be necessary or convenient
in applying for and obtaining such patents thereon and enforcing same, together
with any assignments thereof to COLLAGEN or persons or entities designated by
it.
My obligation to so assist COLLAGEN or its designee in
obtaining and enforcing patents for such Inventions in any and all countries
shall continue beyond the termination of my employment, but COLLAGEN will
compensate me at a reasonable rate after such termination for the time I
actually spend at COLLAGEN's request on such assistance.
6. List of Inventions
I WARRANT THAT I DO NOT OWN OR HAVE RIGHTS TO ANY INVENTIONS
OR WORKS OF AUTHORSHIP MADE PRIOR TO MY EMPLOYMENT BY COLLAGEN EXCEPT AS LISTED
BY TITLE AND DATE OF IDENTIFYING DOCUMENT ON ATTACHMENT 1. The items on
Attachment 1 do not belong to COLLAGEN and are not subject to this Agreement.
If I do not list such inventions or improvements, I represent that I have no
such inventions and improvements at the time l am signing this Agreement.
7. Power of Attorney
If COLLAGEN is unable for any reason whatsoever to secure my
signature to any lawful and necessary documents required, including those
necessary for the assignment of, application for or prosecution of any United
States or foreign applications for letters patent or copyright, I hereby
irrevocably designate and appoint COLLAGEN and its duly authorized officers and
agents as agent and attorney-in-tact, to act for and in my behalf and stead to
execute and file any such application and to do all other lawfully permitted
acts to further the assignment, prosecution and issuance of letters patent or
copyright thereon with the same legal force and effect as if executed by me. I
hereby waive and quit-claim to COLLAGEN any and all claims of any nature
whatsoever which I may now have or may hereafter have for infringement of any
patent or copyright resulting from any such application.
8. California Labor Code
This Agreement does not apply to an Invention which qualifies
fully under the provisions of Section 2870 of the California Labor Code (copy
attached as Exhibit A). I agree to disclose ALL Inventions I make in confidence
to COLLAGEN to permit a determination as to whether or not the Inventions
should be the property of COLLAGEN.
9. No Breach of other Agreements
I promise COLLAGEN that neither my performance of all the
terms of this Agreement nor my employment with COLLAGEN constitutes or will
constitute a breach of any agreement to keep in confidence or in trust that I
entered into before my employment with
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<PAGE> 17
COLLAGEN. I agree not to enter into any agreement, either written or oral, that
would conflict with this Agreement.
10. Injunction
I agree that it would be difficult to measure damage to
COLLAGEN if I breached any of the promises or warranties I make in this
Agreement. Because injury to COLLAGEN from any such breach would be
incalculable and irremediable, money damage would therefore be an inadequate
remedy for any such breach. Accordingly, I agree that if I shall breach any
part of this Agreement, COLLAGEN, in addition to all other remedies it may
have, shall be entitled to a preliminary and permanent injunction to restrain
any such breach by me without showing or proving any actual damage sustained by
COLLAGEN.
11. Indemnification
I agree to indemnify COLLAGEN and to hold it harmless against
any loss, cost, liability or expense incurred by COLLAGEN by reason of my
breach or nonfulfillment of any agreement, representation or warranty contained
herein.
12. Severability
To the extent that any of the agreements set forth herein, or
any word, phrase, clause, or sentence thereof shall be found to be illegal or
unenforceable for any reason, such agreement, word, clause, phrase or sentence
shall he modified or deleted in such a manner as to make the agreement as
modified legal and enforceable under applicable laws, and the balance of the
agreements or parts thereof, shall not be effected thereby, the balance being
construed as severable and independent.
13. Arbitration
I agree that COLLAGEN has the option to have any and all
disputes or controversies (whether or law or fact of any nature whatsoever)
arising from or respecting this Agreement decided by arbitration by the
American Arbitration Association in accordance with the rules and regulations
of that Association.
14. Effective Date
This agreement shall be effective as of 2/1/95.
15. Successors and Assigns
This Agreement shall be binding upon me and my heirs,
executors, assigns, and administrators and shall inure to the benefit of
COLLAGEN, its successors and assigns.
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<PAGE> 18
I execute this Agreement as of February 1, 1995.
EMPLOYEE:
Gary Petersmeyer
- -----------------------------
(Type or Print Name)
/s/ Gary Petersmeyer
- -----------------------------
(Signature)
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<PAGE> 19
ATTACHMENT 1
LIST OF INVENTIONS
<PAGE> 20
EXHIBIT A
SECTION 2870 OF THE CALIFORNIA LABOR CODE
Section 2870 of the California Labor Code is as follows:
(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(2) Result from any work performed by the employee for
the employer.
(b) To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
EXHIBIT 10.89
COLLAGEN CORPORATION
FORM OF OFFICER MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is dated as of
February 7, 1997 by and between [Insert Name of Officer] ("Employee") and
Collagen Corporation, a Delaware corporation (the "Company" or "Collagen").
RECITALS
A. It is expected that another company may from time to time consider
the possibility of acquiring the Company or that a change in control may
otherwise occur, with or without the approval of the Company's Board of
Directors. The Board of Directors recognizes that such consideration can be a
distraction to Employee and can cause Employee to consider alternative
employment opportunities. The Board of Directors has determined that it is in
the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Company's Board of Directors believes it is in the best
interests of the Company and its stockholders to retain Employee and provide
incentives to Employee to continue in the service of the Company.
C. The Board of Directors further believes that it is imperative to
provide Employee with certain benefits upon a Change of Control and, under
certain circumstances, upon termination of Employee's employment in connection
with a Change of Control, which benefits are intended to provide Employee with
financial security and provide sufficient income and encouragement to Employee
to remain with the Company, notwithstanding the possibility of a Change of
Control.
D. To accomplish the foregoing objectives, the Board of Directors
has directed the Company, upon execution of this Agreement by Employee, to agree
to the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and
agreements contained herein, and in consideration of the continuing employment
of Employee by the Company, the parties hereto agree as follows:
1. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason. If Employee's
employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
this Agreement, or as may otherwise be available in accordance with the terms of
the Company's
<PAGE> 2
established employee plans and written policies at the time of
termination. The terms of this Agreement shall terminate upon the earlier of (i)
the date on which Employee ceases to be employed as an executive corporate
officer of the Company, other than as a result of an involuntary termination by
the Company without cause (ii) the date that all obligations of the parties
hereunder have been satisfied, or (iii) two (2) years after a Change of Control.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement. The rights and duties created by this Section 1 may not be
modified in any way except by a written agreement executed by an officer of the
Company upon direction from the Board of Directors.
2. BENEFITS UPON A CHANGE OF CONTROL; TERMINATION OF EMPLOYMENT.
(a) TREATMENT OF STOCK OPTIONS UPON A CHANGE OF CONTROL. In
the event of a Change of Control and regardless of whether Employee's employment
with the Company is terminated in connection with the Change in Control and
unless otherwise limited by the provisions of Section 5, each stock option to
purchase the Company's Common Stock granted to Employee over the course of his
or her employment with the Company and held by Employee on the effective date of
a Change of Control shall become immediately vested on such date as to that
number of shares that would have vested in accordance with the terms of such
option (assuming that Employee had remained in Continuous Status as an Employee,
as defined in the relevant plan and option agreement, for 24 months after the
date of termination of employment) as of the date 24 months after the effective
date of the Change of Control and each such option shall be exercisable in
accordance with the provisions of the option agreement and plan pursuant to
which such option was granted.
(b) INVOLUNTARY TERMINATION FOLLOWING A CHANGE OF CONTROL. In
the event that Employee's employment is terminated as a result of an Involuntary
Termination other than for Cause at any time within 24 months following the
effective date of a Change of Control, then Employee will be entitled to receive
severance benefits as follows: (A) a lump sum payment within five days after the
date of termination of employment equal to 12 months of Employee's then current
base salary, (B) a lump sum payment as soon as practicable after the date of
termination of employment equal to Employee's scheduled bonus for the Company's
fiscal year in which the termination occurs or, if no such bonus has been
scheduled, equal to the bonus paid to Employee for the Company's fiscal year
prior to the Company's fiscal year in which the termination occurs and (C) in
the event that the acceleration of vesting provided for in Section 2(a) did not
occur due to the provisions of Section 5 on the effective date of the Change of
Control, then, except to the extent that the provisions of Section 5 would not
permit acceleration of vesting pursuant to this Section 2(b), each stock option
to purchase the Company's Common Stock granted to Employee over the course of
his or her employment with the Company and held by Employee on the date of
termination of employment shall become immediately vested on such date as to
that number of shares that would have vested in accordance with the terms of
such option (assuming that Employee had remained in Continuous Status as an
Employee, as defined in the relevant plan and option agreement, for 24 months
after the date of termination of
<PAGE> 3
employment) as of the date 24 months after the date of termination of employment
and each such option shall be exercisable in accordance with the provisions of
the option agreement and plan pursuant to which such option was granted. In
addition, Employee will receive payment(s) for all salary, bonuses and unpaid
vacation accrued as of the date of Employee's termination of employment and
Employee's benefits will be continued under the Company's then existing benefit
plans and policies in accordance with such plans and policies in effect on the
date of termination and in accordance with applicable law.
(c) TERMINATION FOR CAUSE. If Employee's employment is
terminated for Cause at any time, then Employee shall not be entitled to receive
payment of any severance benefits. Employee will receive payment(s) for all
salary, bonuses and unpaid vacation accrued as of the date of Employee's
termination of employment and Employee's benefits will be continued under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination and in accordance with
applicable law.
(d) VOLUNTARY RESIGNATION. If Employee voluntarily resigns
from the Company, then Employee shall not be entitled to receive payment of any
severance benefits. Employee will receive payment(s) for all salary, bonuses and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
3. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 50%
or more of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board;
(ii) MERGER/SALE OF ASSETS. A merger or
consolidation of the Company whether or not approved by the Board, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 50% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets; or
<PAGE> 4
(iii) CHANGE IN BOARD COMPOSITION. A change in
the composition of the Board, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of February 7, 1997 or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but an Incumbent Director shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or willful
misconduct in the performance of Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries (ii) repeated
unexplained or unjustified absence from the Company, (iii) a material and
willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and Employee's
voluntary termination, upon 30 days prior written notice to the Company,
following (i) a material reduction or change in job duties, responsibilities and
requirements inconsistent with the Employee's position with the Company and the
Employee's prior duties, responsibilities and requirements or a change in
Employee's reporting relationship such that Employee is no longer reporting to
the Board; (ii) any reduction of Employee's base compensation (other than in
connection with a general decrease in base salaries for most officers of the
successor corporation); or (iii) Employee's refusal to relocate to a facility or
location more than 30 miles from the Company's current location.
4. LIMITATION ON PAYMENTS. In the event that the severance and other
benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's severance benefits under Sections 2(a) and 2(b) shall be payable
either:
(a) in full, or
(b) as to such lesser amount which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under Section 2(a) and 2(b), notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing,
<PAGE> 5
any determination required under this Section 4 shall be made in writing by
independent public accountants agreed to by the Company and the Employee (the
"Accountants"), whose determination shall be conclusive and binding upon the
Employee and the Company for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Section
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 4.
5. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the
Board, upon consultation with the Company management and the Company's
independent auditors, that the enforcement of any agreement between Employee and
the Company, including the provisions of Section 2(a) and 2(b) of this
Agreement, which allows for the acceleration of vesting of stock options granted
for the Company's Common Stock upon the effective date of a Change of Control or
thereafter, would preclude accounting for any proposed business combination of
the Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be accounted
for as a pooling of interests, then any such provision of this Agreement shall
be null and void. For purposes of this Section 5, the Board's determination
shall require the unanimous approval of the non-employee Board members.
6. AESTHETIC TECHNOLOGIES CORPORATION. The Company has recently
announced its intention to formally separate its Aesthetic Technologies Group
and form a new corporation, Aesthetic Technologies Corporation ("AT"). The Board
and management of the Company will continue to evaluate strategies for Aesthetic
Technologies Corporation, which may include a public offering, a "spin-off" or a
"split-off", among other alternatives. If Employee becomes an employee of AT, AT
will assume all of the Company's obligations under this Agreement. The
distribution of assets of the Company to AT, an initial public offering of AT
Common Stock, a distribution of shares of AT Common Stock to the stockholder of
the Company or the termination of Employee's employment with the Company in
connection with commencement of his or her employment by AT will not by itself
or together result in any obligation of the Company to make any payments to
Employee pursuant to Section 2 of this Agreement.
7. CONFLICTS. Employee represents that his or her performance of all
the terms of this Agreement will not breach any other agreement to which
Employee is a party. Employee has not, and will not during the term of this
Agreement, enter into any oral or written agreement in conflict with any of the
provisions of this Agreement. Employee further represents that he or she is
entering into or has entered into an employment relationship with the Company of
his or her own free will and that he or she has not been solicited as an
employee in any way by the Company.
8. SUCCESSORS. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially
<PAGE> 6
all of the Company's business and/or assets shall assume the obligations under
this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession. The terms
of this Agreement and all of Employee's rights hereunder and thereunder shall
inure to the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
9. NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Employee shall be
addressed to Employee at the home address which Employee most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
10. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by Employee and by an authorized officer of the Company
(other than Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.
(d) CHOICE OF LAW. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to
<PAGE> 7
circumstances other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted therefor to
carry out, insofar as may be valid and enforceable, the intent and purpose of
the invalid or unenforceable term or provision.
(f) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the option of either party
by binding arbitration in the County of Santa Clara, California, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
Punitive damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear
their own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 11(h) shall be
void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 8
The parties have executed this
Agreement the date first written above.
COLLAGEN CORPORATION
By: /s/ Collagen Corporation
----------------------------------
Title:
--------------------------------
Address: 2500 Faber Place
Palo Alto, California 94303
[NAME OF OFFICER]
Signature:
----------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,529
<SECURITIES> 0
<RECEIVABLES> 8,912
<ALLOWANCES> 0
<INVENTORY> 13,840
<CURRENT-ASSETS> 51,222
<PP&E> 15,922
<DEPRECIATION> 0
<TOTAL-ASSETS> 178,444
<CURRENT-LIABILITIES> 23,669
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 113,635
<TOTAL-LIABILITY-AND-EQUITY> 178,444
<SALES> 52,369
<TOTAL-REVENUES> 52,369
<CGS> 14,927
<TOTAL-COSTS> 14,927
<OTHER-EXPENSES> 45,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> 939
<INCOME-TAX> 1,674
<INCOME-CONTINUING> (244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
